It is unfortunate that the U.S. Securities and Exchange Commission has chosen to send a message to the crypto industry via extracting a huge $ 100 million settlement of the BlockFi loan platform in an administrative proceeding publicly announced on February 14th. It was a full Valentine’s Day kiss – $ 50 million for the SEC and $ 50 million for about 32 states that had rallied because they saw an easy target.
Powers on … is a monthly opinion columnist for Marc Powers, who has spent much of his 40-year legal career working on complex securities-related cases in the United States after a stint at the SEC. He is currently a lecturer at Florida International University College of Law, where he teaches a course on “Blockchain & the Law”.
Don’t get me wrong: I agree with the SEC that as part of its lending activity, BlockFi likely offered products that could be characterized as “securities” as defined in the Security Act of 1933 in Section 2 (11). Regular readers of Cointelegraph may remember that I was talking about a similar one loan program planned by Coinbase that would probably be “security” given that the loaned assets were all put together for loan purposes. The SEC’s legal analysis takes a slightly different approach, with the loan program presented as both an “investment contract” and a “note” under Section 2 (11). Thus, the fact that the SEC initiated an action for that violation of federal securities law does not surprise me. What is somewhat annoying, however, is both the size of the penalty and the claim that BlockFi operated as an unregistered investment company under the Investment Company Act of 1940.
Actually, I’m not the only one bothered by this. SEC Commissioner Hester Peirce has publicly disagreed with publishing “Statement of Agreement with BlockFi Lending LLC” the same day the SEC proceeding began. In the statement, she asks:
“Is the approach we take with crypto lending the best way to protect crypto lending customers? I don’t think it is, so I respectfully disagree.”
Congratulations to Commissioner Peirce! And because of her fearless audacity in advocating a more reasoned regulatory approach to promoting the nascent crypto industry and because she is, at this time, the only bright beacon on which the industry can rely to question the knee-jerk reactionaries in government – reactionaries who care. little about whether they throw the proverbial baby out with the bath water.
The U.S. regulatory landscape
There was a time when “Crypto Mom” had at least one ally on the commission who, like her, sought to protect a blockchain from over-regulation. Elad Roisman, a fellow Republican nominated by former President Donald Trump, joins Peirce advocating for acceptable regulation for the industry. But he resigned from the SEC in January, having served for a little over three years as commissioner. Peirce was appointed to Trump’s SEC and confirmed in January 2018, so she has one more year of her five-year term. We all hope she is reappointed by President Joe Biden, because once she leaves the SEC, President Gary Gensler’s actions will be unchecked, and we can expect many more from him in the name of investor protection. , to impose disproportion. “Phone book” compromise numbers.
As I wrote earlier, Gensler is an aggressive government regulator, showed its determination in imposing regulation while at the Business Futures Commission. His deep knowledge of blockchain and crypto, as demonstrated by teaching the subject at MIT, is both a blessing and a curse. As president of the CFTC, he passed hundreds of rules and regulations to implement Dodd-Frank legislation, including regulation of exchange transactions. He has spent most of the last 25 years in and out of the U.S. government, so he has political instincts. From his bio, it appears that he has not worked in the private sector since the mid-1990s.
In the SEC press release announcing the BlockFi settlement, Gensler states:
“It [the settlement] further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can enforce those laws. [the Securities Act and Investment Company Act].”
Really? I don’t believe or accept that for a minute. How does a $ 100 million penalty show the SEC’s “willingness to work with crypto platforms”? It seems to me that this is a fairly serious financial penalty.
While I don’t know how this compromise came about, I highly doubt that BlockFi, if and when it approached the SEC to discuss its enforcement efforts, thought that by voluntarily appearing and cooperating, it would be hit with a $ 100 million compromise! Moreover, most start-ups are not able to get over that backup change, and I think this compromise may prevent them from collaborating and self-reporting.
The BlockFi settlement
In this case, BlockFi allegedly offered and sold BlockFi Interest Accounts, or BIAs, through which investors could lend their crypto assets to the company in exchange for its agreement to provide various monthly interest payments. Under the administrative “Order Institution Cessation and Abandonment Proceedings, Making Findings and Imposing an Order on Cessation and Abandonment,” BlockFi generated the interest paid to investors by deploying their assets in a variety of ways, including lending crypto assets to institutions. and corporate borrowers, lending U.S. dollars to retail investors, and investing in stocks and futures. As of December 2021, BlockFi and its subsidiaries held approximately $ 10.4 billion in BIA investor assets and had more than 500,000 BIA investments, including nearly 400,000 in the United States.
Perhaps the SEC is justifying this huge amount of compensation because BlockFi agreed to findings, without confessing or denying them, that it made materially false and misleading statements on its website about its side practices and, consequently, the risks associated with its lending activity. For this, the company is accused of violating the anti-fraud provisions of the Security Act, Sections 17 (a) (2) and 17 (a) (3). However, as Peirce notes in her disagreement:
“There is no allegation that BlockFi failed to pay its customers the money owed to them or did not return the crypto loan to it.”
In other words, there was no financial damage to investors due to the alleged mishaps. Also, like me, she acknowledged that misrepresentations of excessive security were serious – it was less than 24% of the time, according to the order. But to the commissioner, “The combined $ 100 million fine still seems disproportionate.”
One final point about the compromise, and the disagreement, is remarkable. The order states that BlockFi has agreed to seek registration as an investment company. (I’ll leave if I agree with the SEC’s analysis that the BIA program has turned BlockFi into an “investment company” for another day.) However, as Peirce aptly put it, registration is “often a monthly, repetitive process,” and is in question, the time frame is likely to be longer. “
Until the registration takes place, BlockFi has agreed to stop offering loan products to U.S. citizens. There are also other hurdles the SEC could present to deny registration, such as the fact that BlockFi cannot register as an investment company because it issues debt securities, so an exemption from registration is likely to be required. I wonder if BlockFi or its counseling actually thought through a successful path to ever offering BIAs to U.S. citizens again before it settled.
According to Peirce, “The investment protection objective of today’s compromise will be poorly served if retail investors are ultimately removed from participation in these products. Second, our process speaks volumes about our integrity as a regulator. Inviting people to come in and talk to us just to drag them through a difficult, lengthy, unproductive and labyrinthine regulatory process throws the Commission into a bad light and thus makes us a less effective regulator. […] For the U.S. public, our own reputation, and the companies that heed our call to come in and talk to us, we have to do better than we have so far to accept innovation. ”Are you listening, Gensler?
Marc Powers is currently a lecturer at Florida International University College of Law, where he teaches “Blockchain & the Law” and “Fintech Law”. He recently retired from practicing at an Am Law 100 law firm, where he built both its national securities process and regulatory enforcement practice team and its hedge fund industry practice. Marc began his legal career in the SEC’s Enforcement Division. During his 40 years in law, he has been involved in representations including the Bernie Madoff Ponzi scheme, a recent presidential pardon and the Martha Stewart insider trading lawsuit.
The views expressed are solely those of the author and do not necessarily reflect the views of Cointelegraph or Florida International University College of Law or its affiliates. This article is for general information and is not intended to be and should not be taken as legal or investment advice.